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Countdown to Crisis

30 September 2020
In a recent article in Architects Journal, Mark Klimt discusses how the rocketing cost of professional indemnity insurance is crippling construction and undermining the government’s hopes for building our way out of recession.  This article looks at the causes of the crisis and suggests a way out.

Planning for the Future

In August the Government published its White Paper, Planning for the Future, including a proposal to designate three categories of land, namely "Growth", "Renewal" and "Protected".  These would be specified in the plans drawn up by Local Authorities and where land is designated for "growth", outline permission would automatically be granted for developments of the type listed in the Local Authority plans.  Overall, the aim is to make the determination less subjective, to cut red tape and generally speed up the whole process, making it more transparent and rules-based.  Those rules would be drawn up by Local Authorities, based on guidance from the Government and reflecting the specific needs of the particular area. 

The plans are consistent with the Government's commitment to facilitate construction of more affordable housing and to encourage once again more people to own their own properties.  Views on these proposals are invited and the consultation process ends on 29 October 2020.  There will doubtless be comments as to the viability of the scheme, whether realistically it will operate efficiently and on how Local Authorities will resource the drawing up of sophisticated planning requirements.  There will also no doubt be discussions about whether de-regulation will, through supply and demand, reduce prices, or simply hand more power to certain construction companies to control the market.  There is, though, a more immediate and practical issue regarding insurance for those who are responsible for delivering housing projects which, if not addressed, will make any planned overhaul of the Town and Country Planning legislation irrelevant.

Professional Indemnity Insurance premiums

Until the relatively recent past, for a number of years Professional Indemnity Insurance premiums for construction consultants such as architects, engineers and design and build contractors, had been unrealistically low.  It led to an expectation on the part of Insureds for insurance at substantial levels on an each and every claim basis together with additional benefits such as comprehensive support in rebutting claims and heading off future problems, all for a price that was unsustainable from Insurers' position. A number of factors, some gradual and others extraordinary and sudden, have served now to alter that landscape and to create trading conditions which are equally unsustainable from the point of view of Insureds. Architects have been particularly adversely affected.

The collapse of the global financial markets in 2008 obviously had a profound effect on worldwide economies and on the apparent financial impregnability of many Institutions. More than that, however, the search for specific individuals to hold accountable for the collapse of the system  both reflected and accelerated the demand for conspicuous accountability; the presumption that every reversal or misfortune could be traced to the wrong doing of someone and was capable of being compensated. In some instances, obviously, this was justified.  In other instances, however, this led to opportunist claims, including from, for example, individuals who had been tempted into property development by the availability of cheap credit and whose ambition outstripped their knowledge and acumen.  Either way, the relentless march of blame culture has been rapidly accelerating for a number of years and, whatever the nature of the claimant, the universal approach appears to be that, where the paying party will be an insurance pot, it is not only acceptable but part of the necessary rules of engagement, to pitch one's claims at the absolute maximum.  

Meanwhile, along the way, a number of random occurrences around the world such as the September 11 2001 outrages in the United States, the December 2004 Tsunami in Asia and other increasingly regular consequences of extreme weather – none of which relates specifically to construction issues – nonetheless had a direct impact on Insurers' purse. The event that is probably most conspicuously linked to recent increases in  insurance premiums  is the June 2017 Grenfell tragedy in which 72 people lost their lives. Understandably  it gave rise to a public enquiry. It has also given rise to an investigation into all aspects of fire safety and into the need for social housing reform.  

Building practices under scrutiny

Building practices have come under scrutiny including discussions as to whether public safety has been compromised in the interests of economy. Ambiguities in the wording of Building Regulations and relevant Approved Documents have added to a confused picture.  

Building owners have been seeking assurances as to the safety of their own projects from the construction teams to whom they entrusted the commissioning of these projects, and many building owners have decided that a responsible and proportionate response to Grenfell Tower's dreadful human toll is to re-visit their own existing fire strategy and to revise both the design and the specified materials.  Whether this is justified or not is a separate, multi-faceted question.  To date, there has not been a post-Grenfell decision by the Courts that can readily be used as a precedent to show what action is justified and who should pay for it. On one view, a responsible building owner who (not unnaturally) has been affected by the Grenfell horror to the extent that it wishes to upgrade the protections should itself be funding this quest for additional piece of mind. However, particularly in the climate of claims consciousness, accountability and the clamour (fuelled by social media and improved methods of communication) for a swift and conspicuous response, Insurers' concern is that the insurance industry will be looked to for funding a wholesale refurbishment regime, almost regardless of liability. 

Fire safety

A familiar and rather tired caricature of Insurers is that their interest lies solely in collecting premium from their Insureds and then, should the occasion arise, in arguing why the policy will not respond to a particular claim.  (The unrealistically low premiums historically charged by Insurers ought to have put paid to that particular clichéd characterisation).   However, the basic principle of insurance is to provide protection against risk rather than relief for a known loss.  There has, therefore, been a virtually universal restriction on protection for fire safety and fire strategy in professional indemnity insurance policies issued to architects (in particular)  within the United Kingdom Professional Indemnity Insurance Market. This has led to any number of difficulties within the insurance industry. Where there is mistrust of Insurers, such a restriction or exclusion (depending on its terms) has added to this feeling.  

On the other side of the coin, some Insurance Brokers on behalf of their Insured Clients when seeking renewal of their Clients' policies and aware of looming restrictions, have attempted to "block notify" to the existing Insurers all projects which may shortly face a challenge to their fire strategy; this in turn has led to defensive action from Insurers.  Parties who should be co-operating in order to meet the challenge of a claim in a sensible and cost effective manner are instead at odds with each other. 

The consequence of each protagonist operating in a vacuum of self-preservation goes beyond the disruption to the insurance market, however. The wording of endorsements addressing potential liability for these issues can vary. Some endorsements exclude any claims relating to aluminium composite panels (used in Grenfell) or any claims that relate to the combustibility of other cladding materials. Other endorsements go considerably further than that and exclude responsibility for any aspect of fire safety.  Often this will be accompanied by a significant increase in the quoted premium and will commonly be irrespective of previous claims experience.  

An exclusion of anything relating to external/internal cladding is hard enough to manage but a more comprehensive restriction on protection for fire safety means that an architect, is professionally compromised in that it is not able to secure adequate insurance for a key aspect of its professional activity.  Some architectural practices, particularly those of a specific size, have literally been driven out of business already – either as a result of their annual premium now representing an unsustainably high proportion of their annual turnover, or because they do not have the protections they need, or both. This means that a particular type of specialism provided by these architects will simply no longer be available. 

Those architects, meanwhile, who remain will be obliged to pass on the additional cost of their insurance to their Clients, thereby pushing building costs up and putting pressure on the government's promotion of affordable housing.  Where those architects are unable to obtain insurance for key elements of their fire design, they  will be engaged in an elaborate game of passing the liability parcel on to another consultant  and will need to advise Clients to appoint a fire specialists.  If the restriction on protection applies also to fire specialists, then construction work will simply grind to a halt – or be undertaken by construction teams who are unconcerned with compliance and insurance protection. 

The longer term

In the longer term, Government plans to overhaul the planning process and other strategies to rejuvenate the national building programme need also to confront the issues that concern Insurers and which are leading habitually to stand-offs between those seeking and those offering protection for professional wrongdoing. 

Solutions that have been ventured include an expansion of the National House Building Council Scheme, a fresh look at Project Specific Insurance (popular overseas, particularly in Europe but unusual in this country) or some form of government-backed reinsurance scheme. However, that is longer term. Urgent action is needed now.  The Government's mantra during the Covid-19 crisis that "we are all in it together" and its suggested solution to build our way out recession will be meaningless and undermined if this growing crisis in the collision between the insurance and construction industries is not swiftly addressed.  Insurers need to be confident that there is not an agenda to assuage public concern by making the insurance market pay for a global fire safety "re-fit".  That in turn should give Insurers the confidence to do what they are used to doing- providing their Insureds with the protection that those Insureds are entitled to expect; in other words for each risk once again to be individually assessed based on, amongst other things, work profile, claims history and what is affordable protection.  Without that, the parties who should be co-operating in order to address necessary remedial steps will instead be arguing, expensively, amongst themselves, to the detriment of all – not least the Government's suggested response to the unprecedented challenge that the Coronavirus represents to our financial future.

**An abridged version of this article has previously appeared in Architects Journal 

Further Reading